Seven Ways to Meet East Timor's Financial Gap

The ‘financial gap’ in East Timor is not a gap but a budget deficit over the next four years currently estimated at US$126.3 million until oil and gas revenues come on stream in 2007. This means that the government won’t have enough money to cover its expenses over this period. The most important and immediate consequence is that the government may not be able to afford basic services, which can lead to instability.

Why is there a budget deficit?

A budget deficit is a worrying situation for East Timor, particularly bearing in mind the following factors: the international community has spent a massive amount of money in East Timor since 1999; international experts from the United Nations, aid agencies and international finance institutions ran the country until 2002 and continue to maintain a significant advisory presence; East Timor will soon have access to very lucrative natural resources in the Timor Sea. The two questions are: How can this country bridge the budget shortfall? and Why, at this point, is this country unable to finance its own, modest national budget?

Donors and the East Timorese government identified the budget shortfall more than a year ago. La’o Hamutuk reported on future problems for the national budget due to technical problems in the Bayu-Undan field in August last year (See LH Bulletin Vol. 4, Nos. 3-4). However, the real reason for the budget shortfall is that East Timor has been prevented from receiving revenues from the Laminaria-Corallina oil field, which belongs to East Timor under the United Nations Convention on the Law of the Sea principles. Australia has taken in more than $1 billion in revenues from Laminaria-Corallina, enough to cover the budget shortfall eight times over. Moreover, as East Timor’s oil revenue will come primarily from one field, Bayu-Undan, the country will remain vulnerable to scheduling or production problems with that field.

Some fault needs to be apportioned to the international planners who based East Timor’s long term revenue projections on the planned schedule of ConocoPhillips. Oil company schedules are not firm projections. If international advisors understood more about oil industry practice, perhaps East Timor’s government could have prepared for the budgetary difficulties and asked donors to extend their support three years ago. In the meantime, the world has undergone enormous changes, particularly the tragic events of 11 September 2001 and the subsequent U.S.-led wars in Afghanistan and Iraq. East Timor is fading in urgency and awareness, and donor priorities now lie elsewhere.

The approximately $3 billion spent by the international community for the reconstruction of East Timor since 1999 has had a negligible effect on the local economy. A large proportion of the money was not actually spent in East Timor, but instead paid for international Peacekeeping Forces and UN police. Foreign consultants, wages for international staff, foreign contractors and supplies procured from outside of East Timor account for much of the rest.

The upper graph shows East Timor’s government’s actual and projected annual income and expenses and Australia’s revenues from the Laminaria-Corallina oil field. For each year, the difference between left bar (income) and middle bar (expense) represents the deficit -- if expenses are higher than income, the government needs more money. The expense budget increases slightly for each year, as is normal, but the income budget drops from 2004 for the next three, as donor money decreases and revenues from Bayu-Undan construction taxes decline. From 2006 onward, income increases from Bayu-Undan oil production.

The third (striped) bar represents what the Australian government receives from Laminaria-Corallina, in disputed territory but closer to East Timor than to Australia. This declines each year as most of Laminaria’s oil has already been sold. Australia received $638 million between 1999 and 2002, not shown on the graph. East Timor has not received one cent.

The lower graph shows the total budget deficit and Laminaria income, with each year added to the accumulated number from previous years. It is clear that the $1.266 billion Australia will have stolen from Laminaria by 2007 could pay East Timor’s $129 million budget gap many times over.

The Proposed Options

In this article, we will attempt to analyze the seven methods for closing the gap which have been proposed for discussion by the government and the international financial institutions. No single option is a solution. It is not possible to choose one and leave the rest, and a combination must be applied.

The first suggestion is for the government to reduce the current expenditure budget. Remembering that living costs in East Timor are high, cutting spending would mean reducing the number of civil servants or cutting salaries; the government spends $27.25 million on 17,150 civil servants, making an average monthly salary of $132. Further cuts could be made in services like heath and education, or by reducing transportation costs. There is not a lot of room to cut government spending without a very negative impact on essential services.

Selling vehicles donated by the UN is the second idea. The government is currently trying to sell 600 Tata Sumos in East Timor for $1,000-$3,000 each. It has 400 Land Rovers for sale outside for approximately $6,000 each. Although the government estimates a revenue of $4.2 million from vehicle sales, IMF predictions are much lower at $1 million.

What Do IFIs Want?

International Financial Institutions like the World Bank and ADB have a singular view of development. They prioritize economic growth at the expense of fulfilling social needs. They promote policies to encourage the private sector, such as low domestic taxation, low import and export tariffs and limited labor rights protection mechanisms.

The IFIs encourage private sector companies to provide public goods like health, education, water, infrastructure, and power. The role of the private sector in providing public goods often has a negative impact on the poor and dubious benefits generally (see Editorial, LH Bulletin Vol. 4. No. 5).

The IFIs have a ‘one size fits all’ model of development. They are not open to innovation or ideas that contradict their model. Governments who borrow are limited in their ability to provide creative, locally appropriate solutions to their own development problems. Borrowing means contracting with the IFIs to be the country’s ‘development policy police’ for the duration of the loan. There are examples of countries with excellent health, education and agricultural systems that have developed successfully without the World Bank.

The third possibility is for donors to continue or increase their budgetary support through the World Bank-monitored Transition Support Program (TSP) which commenced in 2002. At the international donors meeting in December 2003, the government urged donors to extend their support for the TSP beyond the initial three year time frame (2002-2005) to 2008. If donors continue at the requested level of support ($25 million 2004-5 and $18 million 2005-6), it will reduce the deficit by $43 million.

Realigning bilateral and multilateral support according to government priorities as defined in the Sectoral Expenditure Program (SEP) (also called the Sector Investment Program (SIP)) is the fourth option. According to the Register of External Assistance, ongoing and planned bilateral and multilateral projects amounted to over $230 million.

SEP is a breakdown of necessary investment and expenditure by sector. SEP covers education and training; health; agriculture and livestock; natural resources and the environment; communications; power; transportation; water supply and sanitation; and private sector development. By coordinating bilateral and multilateral donor projects more closely with priorities outlined in the National Development Plan, the government hopes to use donor funds to substitute for some of the expenses currently in the national budget.

The fifth idea is to increase internally generated revenues, currently approximately $20 million per year. While this might be possible, it is unlikely to have a large impact. The current tax base is small and the government must balance the pros and cons of raising import and export tariffs with the economic impact. Importantly, most highly-paid people who could contribute the most to the national budget through income tax are wage tax-exempt, including UN staff, UN contractors, consultants, diplomats, or international employees of international institutions.

The sixth option is to use oil money from the Timor Sea reserve account, which currently contains $13.8 million and could increase to $90 million by 2007. Taxes on Timor Sea operations are already used as part of the government budget, but royalties (rent paid to East Timor for oil and gas extracted and sold) are planned to be saved to provide for future generations. At present, there are no regulations for this reserve, and the money is kept in a separate account in the Banking and Payments Authority, to be transferred into the future oil reserve fund. It is possible to use this money to make up the budget shortfall, but it would be a dangerous precedent, contradicting the government’s stated commitment to save and invest East Timor’s petroleum entitlement for a time after all the oil has been sold. Without legal protection, the long-term future of East Timor could be squandered to solve a short-term problem.

World Bank Loans

The size and term of a loan is decided on a country by country basis. According to World Bank criteria, East Timor is currently able to access $5 million a year as a grant (currently used for the Transition Support Program) and $9.3 million per year as a loan. East Timor can choose to borrow its allocation for one year or for several years. For each loan there is an initial charge of 0.75%, followed by annual fees of 0.5% on the outstanding balance. East Timor would not have to pay for the first 10 years, but the loan must be paid within forty years. For more information on World Bank and ADB loans see LH Bulletin Vol. 4 No 1.

The seventh possibility is to borrow money, probably from the World Bank or Asian Development Bank (ADB). The IMF can also make loans to cover temporary budget deficits. All loans to poorer developing countries like East Timor have conditions which have to be incorporated into development plans like the World Bank’s Poverty Reduction Strategy Paper (PRSP), or ADB’s Country Assistance Program.

The World Bank has stated that East Timor would not need a PRSP, since it already has the National Development Plan. However, if East Timor borrows, the World Bank would have much greater influence in the design and implementation of policy to meet priorities in the National Development Plan.

Each year the government defines targets for its actions. The World Bank monitors the government’s progress in meeting its targets, as part of the Transition Support Program. Borrowing money would essentially extend this process for the duration of the loan and give the World Bank a much greater say in how the government designs and implements its national budget.

Conclusion

The international community has a responsibility to support East Timor over the long term. For 24 years, the international community enabled Indonesia’s brutal occupation — and nations such as Indonesia, Australia and the United States actively supported it. The community of nations has not condemned Australia’s bullying tactics in the Timor Sea or intransigence in negotiations on the maritime boundary. The Laminaria-Corallina oil field, East Timorese under international principles, is nearing the end of its productive life. It has already paid over $1 billion dollars into the Australian national treasury. This is East Timor’s money and would eliminate the financial gap. If it were available, East Timor would not be facing decisions about cutting essential services or going into debt less than two years after independence.

Australia's Distortions

On Australia’s national day, East Timor’s supporters contacted the Australian government to encourage it to respect East Timor’s sovereignty. Australia often replied, explaining their views and distorting the facts. One example is below.

AUSTRALIAN HIGH COMMISSION: LONDON

Tel: 0207 379 4334 Direct enquiry: 0207 887 5589

Australia House Strand London WC2B 4LA

10 February 2004

Mr Paul Barber TAPOL 25 Plovers Way Hants GU34 2JJ

Dear Mr Barber,

Comment from La'o Hamutuk

Thank you for your letter of 26 January to the High Commissioner stating your views on the negotiation of a permanent maritime boundary between Australia and East Timor. The High Commissioner has asked me to take this opportunity to explain Australia’s position and correct some of the erroneous information that has been disseminated on this issue.

Most of the erroneous information on this issue has come from Australian officials, including asserting an outdated “continental shelf principle”, denying the full extent of East Timor’s Timor Sea territory, and applying Australia-Indonesia agreements to East Timor.

Australia acknowledges without reservation our obligations, as set out in the UN Convention on the Law of the Sea, to delimit our maritime boundaries with East Timor. Preliminary talks on a permanent boundary commenced in Darwin in November 2003. International experience shows that settling maritime boundaries can be a complex and time-consuming exercise due to the legal and technical complexity of the issue at stake. Australia approaches this process in good faith.

The November 2003 meeting took place only after East Timor had repeatedly requested talks for more than a year. At that meeting, East Timor proposed to meet monthly until an agreement was reached. Australia claimed they did not have the human resources to meet monthly, and the next meeting won’t take place until April 2004.

International experience shows that other countries whose maritime territory overlaps Australia’s -- New Zealand, France and Norway (near Antarctica) -- have been waiting for decades to resolve boundaries by negotiation, even with no oil at stake. When countries want to resolve such issues, they can do it in 2-3 years, as Australia and Indonesia did in 1970-72.

Although negotiations on a permanent boundary may take some time, East Timor already stands to gain from resource developments in the Timor Sea through legal arrangements in the form of the Timor Sea Treaty which came into force in 2003. It enables the development of Timor Sea petroleum resources without prejudice to the permanent boundary negotiations. This agreement provides East Timor with 90 percent of royalty revenues from resource developments in the Timor Sea and provides the legal certainty required by investors while the issue of a permanent boundary is resolved. Your concerns about potential loss of revenue to East Timor are therefore factually baseless.

The area covered by the Timor Sea Treaty includes about 40% of the petroleum resources which are closer to East Timor than to any other country, all of which belong to East Timor under Law of the Sea principles. Australia occupies the remaining 60%, and is collecting revenues.

The Laminaria-Corallina oil field is much closer to East Timor’s coast than to Australia. It has paid more than U.S. $1 billion to Canberra since beginning production in 1999, and not one cent to East Timor. The longer it takes to resolve the boundary, the more of East Timor’s oil revenue will be pocketed by Australia.

Australia’s declaration in March 2002 excluding the settlement of maritime boundaries from compulsory dispute resolution by the International Court of Justice and the International Tribunal for the Law of the Sea, reflects our strong view that any maritime boundary dispute is best settled by negotiation rather than litigation. This is precisely the course of action that Australia has now committed to in its discussions with East Timor on a permanent maritime boundary.

Your sincerely,

Traci Williams Third Secretary

The rule of law, including impartial international legal mechanisms for resolving boundary disputes, exists to protect the small and weak from the predations of the rich and powerful, as well as to support the entire community of states. By closing legal avenues of appeal to East Timor, Australia hopes that “negotiations” between unequal parties will follow the law of the jungle, or will drag on for decades until Australia has harvested all the petroleum in disputed territory.

The text of this letter is accurate and complete, the layout is a simulation.

Maritime Boundaries Slow in Coming

As La’o Hamutuk has written before (see, for example, LH Bulletin Vol. 4, No. 3-4), the majority of oil and gas resources that should belong to East Timor under international legal principles are under Australian occupation pending agreement on a permanent maritime boundary, and Australia has taken in substantial revenue from them since 1999.

Nearly two years ago, Australia withdrew from participation in legal processes for resolving maritime boundaries, and in October 2002 East Timor’s new government asked to begin negotiations. Australia delayed responding until both countries had ratified the interim Timor Sea Treaty and signed an agreement to divide revenues from the Greater Sunrise gas fields 82% in favor of Australia.

The first round of boundary talks took place in Darwin last November 12, more than a year later. East Timor asked for monthly meetings until boundaries are settled, but Australia will only meet every six months, claiming they don’t have enough people or money to meet more often. See previous page for Australia’s position, and the distortions they tell to defend it.

In December 2003, La’o Hamutuk told the Development Partners (Donor’s) Meeting:

… the economic stability of Timor Leste requires that we receive full legal entitlement to our resources. We continue to be discouraged by Australia’s eagerness to steal our oil and gas, as symbolized by the rapid depletion of the Laminaria-Corallina oil field. This field would belong to Timor-Leste under UNCLOS principles, but Australia has received approximately one billion U.S. dollars from it since 1999, making Timor-Leste the largest foreign contributor to Australia’s national budget.

Since Australia’s uncooperative approach to the talks, East Timor’s government has been encouraging a multi-faceted campaign, as La’o Hamutuk and others have urged for several years. Prime Minister Mari Alkatiri has asked Australia to refrain from exploiting petroleum resources or signing new contracts in disputed areas (a request Australia has ignored); East Timorese officials and diplomats are publicly challenging Australia’s intransigence; the Prime Minister’s Timor Sea Office is reaching out to media and has set up a web site (www.timorseaoffice.gov.tp).

La’o Hamutuk has updated our OilWeb CD-ROM with significant new information. More than 200 copies of this invaluable resource have been distributed worldwide. The new edition adds reports from Australia Day actions, on the Australia-East Timor negotiations, the Timor Sea Office website, and many background articles on maritime boundaries, Australia’s policies, transparency, oil funds, the “resource curse,” corruption, climate change and other relevant issues. It also contains the Bayu-Undan contracts between the oil companies and the Timor Sea Designated Authority, as well as updated financial and technical information about East Timor’s petroleum finances and projects. All of the original information, historical and political analysis, audiovisual material, etc. is still on the new edition, which has more than 2,000 files.

Copies are available from our Dili office and international distributors including ETAN (US), TAPOL (Europe), and the Timor Sea Justice Campaign (Australia): $2 for campaigners, $50 for institutions.

Together with solidarity activists in Australia, the United States and around the world, La’o Hamutuk has been encouraging and facilitating a worldwide campaign to pressure and shame Australia into respecting East Timor’s nationhood. Just before the November talks, more than 100 organizations from 19 countries wrote to Australian Prime Minister John Howard, urging his government to set a firm timetable for establishing a permanent maritime boundary within three years, and to treat East Timor “fairly and as a sovereign nation, with the same rights as Australia.”

The Australian government replied that “the process [of delimiting maritime boundaries] is long and complex. Based on this experience, the Australian Government does not think it sensible to set an end-date for the process.” Australia also “has no plans to revisit its decision in March 2002 to no longer accept the jurisdiction of the International Court of Justice and other dispute settlement mechanisms…”

Many Australian people feel otherwise, and have launched a Timor Sea Justice Campaign, initially in Melbourne. The group is calling on the Australian Government to:

Immediately negotiate permanent maritime boundaries with East Timor in good faith.

Respect international law by rejoining legal mechanisms for resolving maritime boundary disputes and agreeing to be bound by their decisions.

Place all Australian Government revenue from oil and gas fields which are closer to East Timor than to Australia into trust. When permanent boundaries are finalized the trust funds should be distributed according to the entitlement of each country.

Stop unilateral exploitation of resources in disputed areas.

Thai Supporters of East Timor mark Australia Day outside the Australian Embassy in Bangkok.

Australia celebrated its national day on 26 January, the 216th anniversary of the first British settlement in Australia. In East Timor and around the world, people argued and pleaded with Canberra to treat East Timor seriously.

The Oilwatch Network, headquartered in Ecuador, is supporting East Timor’s efforts to secure our resource birthright, while simultaneously helping us learn about, and hopefully avoid, the “resource curse” which brings poverty, corruption, destruction and conflict to so many oil-rich nations. La’o Hamutuk participated in the Oilwatch biannual general meeting in Colombia last September, and worked with Oilwatch to organize the East Timor-Nigeria exchange in January (full report in next Bulletin). Together with East Timor’s Independent Information Center on the Timor Sea (CIITT), we participated in an organizing meeting for Oilwatch Southeast Asia in Bangkok in February (see report on page 2), and will continue to work closely with this network of the Global South, linking people in petroleum-rich tropical forest countries around the world.

Bayu-Undan, the largest oil and gas field in the Timor Sea’s Joint Development Area, began test production in February, although it will be many months before economically significant oil can be sold (see article on Financial Gap). Over the next few months, La’o Hamutuk will continue to monitor activities there, as well as analyze plans to use and save revenues from East Timor’s oil entitlement.

La’o Hamutuk (Walking Together in English) is an East Timorese non-governmental organization that monitors, analyzes, and reports on the principal international institutions present in Timor Lorosa’e as they relate to the physical, economic, and social reconstruction and development of the country. La’o Hamutuk believes that the people of East Timor must be the ultimate decision-makers in this process and that this process should be democratic and transparent. La’o Hamutuk is an independent organization and works to facilitate effective East Timorese participation. In addition, La’o Hamutuk works to improve communication between the international community and East Timorese society. La’o Hamutuk’s East Timorese and international staff have equal responsibilities, and receive equal pay. Finally, La’o Hamutuk is a resource center, providing literature on development models, experiences, and practices, as well as facilitating solidarity links between East Timorese groups and groups abroad with the aim of creating alternative development models.

La’o Hamutuk welcomes reprinting articles or graphics from our Bulletin without charge, but we would like to be notified and given credit for our work.

In the spirit of encouraging greater transparency, La’o Hamutuk would like you to contact us if you have documents and/or information that should be brought to the attention of the East Timorese people and the international community.